Inflation can be categorized into two parts namely Monetary Inflation and Price Inflation. Monetary Inflation happens when in a given economy there is a sudden and drastic increase in the inflow quantity of money. Price Inflation is the sudden rise of prices for services and goods over a short period of time. Both these types of inflations are often interrelated and cause a negative impact on individuals and the economy on the whole. Both types of inflation have both negative and positive effects, but mostly 75% of the effect can be negative.
Negative Effects of Inflation:
ï§ Higher uncertainties and Increased risk factor:
During inflation the risk factor is always high as there will be a constant fluctuation in prices of goods and other services. The instability in prices in turn leads to higher uncertainties.
Hoarding is a process where people try to acquire goods in bulk and store it, when they know the prices for these goods is going to go up. Later when there is much demand for these goods the buyer will sell the goods for an increased profit.
It is often the creditors who get hurt real bad as the money they get back from the borrowers will be much less than the current going rates. This is also referred to as diffusion of income effect.
ï§ Recipients with Fixed Income:
Recipients with fixed income will be hurt the most as the inflation increases their income will starting losing out and have a lot less value over a period of time. So it is not advisable to have a fixed income scheme.
Positive Effects of Inflation:
ï§ Faster Growth:
At moderate levels of inflation can gradually increase the investment in an inflated economy can lead to a higher and steady flow of income, which results in faster growth of the investor.
ï§ Burrowers will Benefit:
With the fixed interests in place burrowers will have to pay the same amount of money they burrowed in spite of the higher interest rates.
Inflators are the people who are responsible for causing inflations; they are the ones who make a huge profit out of the inflation.
Useful tips for surviving an inflation period:
ï§ Having cash in your saving account always helps, if a person is getting 3% interest for the money in his savings account, then the interest rates are likely to go up to 8 -10% during inflation. So the account holders want profit or will lose out on the interest money.
ï§ Buying bonds before inflation can prove risky to the buyer as inflations normally bring down the value of long term bonds drastically and make it worthless.
ï§ Investing in commodities and durable goods would seem sensible rather than having money in a savings account. The fluctuation of interest rates cannot be predicted and trusted.
ï§ Do an in-depth research on your monthly bills like electricity, cable and internet. This would certainly help to remove unwanted services and in turn bring down your monthly expenditure.
These are some useful tips to follow during inflation.